Fintech and the Finnish Market — Are They Ready for Each Other? / Jaakko Lindgren, Thomas Landell

The technological revolution has disrupted and altered many
industries in recent years. The most intense hype surrounding certain
new technologies, like big data or the internet of things, may be
settling, but not even traditionally static business can afford to rest
on their laurels as Silicon Valley is constantly creating new
innovations.

The next big thing on both sides of the Atlantic is financial technology, more commonly known as fintech. As the Guardian noted in an article last spring,
startups focusing on specialised financial services are making use of
cheap cloud computing, big data, mobile devices and social media
applications to compete with banks and other conventional providers of
financial services.

From personal finance planning apps to crowdfunding, fintech
companies leverage user-friendly interfaces and the flexibility of their
services to take market share in products and services[1] that used to be the exclusive domain of larger players.

Complex Regulation Makes Dangerous Waters for Fintech Startups

As fintech companies enter the Finnish market, their biggest
challenges may well be understanding and navigating complex regulation.
Even simple fintech services, such as providing mobile payment solutions
or trading applications, may require licenses to provide payment or
investment services.

When it comes to peer2peer lending, operators should keep in mind
that micro-lending is also regulated by consumer protection rules, and
prospective service providers may need to register with regional
authorities.

Obtaining licenses for all this and complying with statutory
obligations can be both cumbersome and costly, which is far from an
ideal fit for the generally lean and agile startup business model.
Therefore, creating a proactive policy to address and mitigate
regulatory concerns are vital initial measures for a startup looking to
enter the fintech market.

Personal Data a Potential Land Mine

The use of personal data is strictly regulated in the EU under the
Data Protection Directive (95/46/EC). Further data protection regulation
is expected to come into effect during the upcoming years in the form
of the new European Data Protection Regulation. At the same time as
regulation is increasing, new technologies are looking for broader
opportunities to permissibly utilise personal data.

Certain personal data has long been used for risk analysis in the
financial industry. However, many traditional concepts associated with
data processing are facing a revolution in the form of developments such
as dual purpose social media applications, such as peer2peer lending
platforms.

As tempting as the significant opportunities to use personal data
available through various social media platforms may be to fintech
startups, they have to watch their step and make sure their operations
comply with constantly developing data protection rules.

What to Look Out for In Fintech Investments

When looking to invest in fintech startups, venture capital investors
should keep in mind the regulatory landscape described above. Most
importantly, investors need to take into account the possibility of
increased compliance and risk management costs as well as liability
risks when conducting due diligence relating to start-up targets. This
is especially demanding in the current environment of swelling
regulation that remains inherently ambiguous with respect to new and
disruptive technologies.

At worst, a fintech startup’s business could involve significant liability risks if it
has neglected regulatory obligations. It is vital that investors
identify such situations and engage the expertise to appropriately
assess the risks involved when making investment decisions.

As fintech companies gain more ground in the financial sector, venture
capital and private equity investors have two possible ways to react: adapt or invest. If the financial sector is reluctant to adapt by embracing new technologies, we may see a repeat
of the kind of changes that occurred in the music industry since the
launch of mp3 and P2P networks, albeit restricted by the industry’s
regulated nature.

The mobile pay applications that have been launched by large banks
and welcomed by customers are a good example of using investment to
integrate fintech in existing businesses.

While interest among investors grows, fintech start-ups in the US are
already expanding into insurance, yet another highly regulated
financial services business. Despite the limitations set by regulation,
the advance of fintech into the Finnish market seems inevitable. After
all, this is a country that is already accustomed to widespread and
well-functioning digital financial services, such as long-established
internet banking portals.